EXPLAINER: Return of investment vs. return on investment: What's the difference

When investors get into business, getting back their money does not necessarily mean a profit, which highlights the distinction between a return of capital and a return on investment (ROI).

While the two terms sound similar, they refer to different aspects of an investment. One relates to the recovery of the original amount put in, while the other measures gains or losses generated, relative to the seed investment.

Return on investment (ROI) and return of capital figured in the discussion on Wednesday's impeachment trial of Vice President Sara Duterte, as the defense presented corporate records detailing her investments in GenCorp.

Defense witness and GenCorp in-house counsel Suzette Balucanag-Punay testified that Duterte had a “loose investment” in the company and received P2.14 million in returns of capital from 2022 to 2025.

A return of capital happens when an investor receives back the principal originally invested, all or in part. This does not automatically mean, however, that the investment generated earnings. A return of capital may be issued if the income is not enough to pay for a promised distribution.

“Return of capital is when the fund uses shareholder principal, or the money shareholders paid to buy fund shares, to pay for all or part of a distribution. In other words, the fund gives shareholders back their own money,” the United States Securities and Exchange Commission (SEC) explained in a bulletin.

Return on investment, or ROI, meanwhile, is a gauge of how profitable an investment has been compared with the cost.

“Return on investment is a financial ratio that measures the profit generated by an investment relative to its cost. Key factors influencing ROI include the initial investment amount, ongoing maintenance costs, and the cash flow generated by the investment,” according to Investopedia.

A return on investment is calculated by dividing the net profit by the cost of the investment and multiplying by 100.

As an example, an individual who invests P100,000 in a business and later receives P120,000 has recovered the original P100,000 and earned an additional P20,000. This translates to a 20% ROI, which means the investor earned 20 centavos for every peso invested, excluding other costs.

If the individual receives only P100,000, this would mean the original capital was recovered, but no additional profit was generated, resulting in a zero ROI.

Meanwhile, receiving less than P100,000 would mean the investor lost money, equivalent to a negative ROI.

It is also important to consider the period over which an investment generates returns, as an ROI earned in one year is different from the same percentage of return accumulated over five years.

Overall, recovery of capital means getting the initial investment back, while earning a return on investment means making that investment grow.

The Bangko Sentral ng Pilipinas (BSP) has also cited the relationship between potential risks and returns, as investments that offer higher potential returns generally carry higher risks.

“Do not be enticed by the promise of extremely high returns. Understand that the higher the return on investments, the greater the risk,” it said in an advisory. —Jon Viktor Cabuenas/LDF, GMA News